Materials market veteran Esteban Sagel has taken on one of the occupational hazards of the North American resin sector — those hotly debated price indexes.
Sagel is principal of Chemical & Polymer Market Consultants in Houston and has almost 30 years of industry experience. In a recent LinkedIn post — and a longer piece on his firm's website — he describes resin price indexes as "a commonly used tool to set transactional prices in petrochemical supply contracts," but he adds that they "can be perplexing even for seasoned industry professionals."
That's a very diplomatic way to put it. When I've described the index process to people new to the plastics industry, they sometimes act like a driver who thought he just had a fender bender only to find out the car has been totaled.
(Full disclosure: Plastics News also publishes a pricing index. I've compiled that data on virgin resins for many years.)
In his post, Sagel describes the index process, explaining that each index "uses its own definitions and methodologies." He adds that this complexity "is compounded when different publishers report varying index values for the same commodity."
"The formula for determining transactional prices (whether it's based on an index minus a discount, the index itself or an index plus a surcharge) varies depending on several factors, including buyer size, location, product specifications and the chosen index," Sagel said. "Only the contracting parties know the exact formula used and the resulting transactional price, leading to a lack of transparency.
"In a market as large as petrochemicals, where up to 60 percent of transactions can occur under contractual terms, this opacity creates significant challenges," he added.
Sagel has really hit the nail on the head here. "The primary issue with this system is confusion," he continues, pointing out that prices listed by indexes often aren't transactional prices, but essentially serve as the basis for transactional prices.
"This is especially problematic for companies further down the supply chain, such as consumer packaged goods companies, which may unknowingly overpay for inputs like packaging due to the reliance on these indexes," he noted.
"Even commodity producers are not immune to this confusion. I have seen producers treat indexes as actual prices, leading to business decisions that ultimately harm their economic interests. Over time, the value of an index can diverge from the true market price, trapping producers in unfavorable contracts."
Sagel even gets into the issue of non-market adjustments, a bane of existence for anyone who publishes an index. He describes non-market adjustments as times "where publishers arbitrarily alter index values to align them with what they perceive as the average market price."
"These adjustments can lead to significant disruptions, forcing contracts to include protective language against such unpredictable changes."
I've written about the practice of using resin price indexes a few times, most recently in 2020 when Chemical Data LLC — a widely used index — was acquired by data firm ICIS. The other most widely followed index is published by Chemical Market Analytics, a unit of data firm OPIS. The CMA business previously was owned by IHS Markit.
As I wrote at the time, the use of indexes avoids lengthy haggling over pricing while also providing each side with a fall guy if they don't agree with what's been reported. This process also doesn't really exist for any other commodity product that's sold in billions of pounds.
Although some have had limited success, plastic resin pricing largely has proven immune to futures contracts and other more transparent methods by which prices are set for commodities. The reasons for this are too complex to cover in a blog post. It's safe to say that resin price indexes still hold considerable influence.
In his post, Sagel has done a great job of explaining the mechanics of index pricing. For now at least, resin buyers still need to remember the meaning of the classic Latin phrase caveat emptor — let the buyer beware.
Senior Reporter Frank Esposito has been covering resin pricing for Plastics News since 1997.